Summary: Reading news about trends and events without explanations of why provides entertainment, but seldom gives actionable insights — whether for individual action or public policy initiatives. Now we have the explanation for the boom in what seemed like unsustainable subprime auto lending: new technology makes it profitable.
“When I was sixteen, I went to work for a newspaper in Hong Kong. It was a rag, but the editor taught me one important lesson. The key to a great story is not who, or what, or when, but why.”
— Elliot Carver, in Tomorrow Never Dies (1997)
The increase in auto lending to subprime borrowers — on mad terms — has boosted auto sales (25% of loans have durations of 82-84 months; the average loan-to-value is 0ver 100%). The combination of high levels of subprime borrowing and easy terms is odd — especially so soon after the massive consumer defaults of 2008-09. Many articles that describe this situation imply that lenders have become imprudent or even mad. I’ve done so (see the posts listed in the last section below). That’s sloppy analysis. “Why” is usually the vital question to ask, although often the most difficult to answer. What has changed to make lenders comfortable making such loans?
The New York Times provides the answer: it’s new technology:
24 September 2014 — Opening:
The thermometer showed a 103.5-degree fever, and her 10-year-old’s asthma was flaring up. Mary Bolender, who lives in Las Vegas, needed to get her daughter to an emergency room, but her 2005 Chrysler van would not start. The cause was not a mechanical problem — it was her lender.
Ms. Bolender was 3 days behind on her monthly car payment. Her lender, C.A.G. Acceptance of Mesa, Ariz., remotely activated a device in her car’s dashboard that prevented her car from starting. Before she could get back on the road, she had to pay more than $389, money she did not have that morning in March.
“I felt absolutely helpless,” said Ms. Bolender, a single mother who stopped working to care for her daughter. It was not the only time this happened: Her car was shut down that March, once in April and again in June.
This new technology is bringing auto loans — and Wall Street’s version of Big Brother — into the lives of people with credit scores battered by the financial downturn.
Auto loans to borrowers considered subprime, those with credit scores at or below 640, have spiked in the last five years. The jump has been driven in large part by the demand among investors for securities backed by the loans, which offer high returns at a time of low interest rates. Roughly 25 percent of all new auto loans made last year were subprime, and the volume of subprime auto loans reached more than $145 billion in the first three months of this year.
But before they can drive off the lot, many subprime borrowers like Ms. Bolender must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. Using the GPS technology on the devices, the lenders can also track the cars’ location and movements.
The devices, which have been installed in about two million vehicles, are helping feed the subprime boom by enabling more high-risk borrowers to get loans. But there is a big catch. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle.
It’s a good analysis, well worth reading in full.
Technology marches on, irresistibly. But the techno-utopians, like Marc Andreessen (Wikipedia), misunderstand the effects. Technology, like a natural force, can as easily harm as benefit society. The previous industrial revolutions generated vast fortunes — at the cost of massive suffering for several generations, until collective action by people forced through social reforms to harness the forces unleashed.
That will be our challenge as well. Technology merely recasts in new forms social ills humanity has grappled — with modest success — for millenia. As we see here — with unregulated lending to the working poor, enabled by new tools to reduce losses, produces an explosion of usury.
“The rich rules over the poor, and the borrower is the slave of the lender.”
— Proverbs 22:7
For More Information
(a) Other research about auto loans:
- “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates“, New York Times, 19 July 2014
- “Just Released: Looking under the Hood of the Subprime Auto Lending Market“, New York Fed, 14 August 2014 — Reassuring words from the Fed, just like their analysis about subprime mortgages in 2006-07
(b) Posts about consumer lending:
- Rising consumer debt driving the recovery: boon or bane?, 10 November 2013
- Auto loans are a driver of the expansion, but might be running out of gas, 1 April 2014
- Debt unleashed again to ravage America: out of control auto lending, 2 July 2014
- Auto loans: once a boon for America, now a bane, 7 August 2014
(c) Posts about the debt supercycle:
- Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
- A picture of the post-WWII debt supercycle, 26 September 2008
- Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008